(+) Bitcoin Hard Fork: The Game Plan

2 weeks ago 7ring Comments Off on (+) Bitcoin Hard Fork: The Game Plan

Bitcoin’s upcoming fork is arguably its most divisive one yet. Clear battle lines have been drawn, setting the stage for a potentially Lutheran-style schism in the blockchain community. (Note: the author is being a bit dramatic, but all signs seem to show that a serious divergence is building momentum.)

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By looking at bitcoin’s price, one would hardly conclude that the original blockchain currency is facing turmoil. Bitcoin added a staggering 24% last week en route to fresh record highs. However, one of the motivations for buying bitcoin is the hard fork itself. If you own bitcoin on fork day, you will also receive equal value of the newly minted digital currency. (If your cryptocurrency exchange doesn’t support the new coin, you can always threaten to sue it like the backers of Bitcoin Cash did to Coinbase.)

SegWit2x

The upcoming hard fork, which is scheduled sometime in mid-November, will create two competing versions of bitcoin. We speculated recently that the new coin is unlikely to create controversy over the “real” bitcoin, but as Jeff John Roberts of Fortune argues, this disagreement is already under way.

Like the hard forks before it, the main crux of the debate is how to best optimize the Bitcoin network. Backers of SegWit2x want to double the size of bitcoin blocks to boost transaction capability.

Backers of the new protocol include bitcoin miners who use advanced computers to compile transactions. In their view, bigger blocks are desperately needed to accommodate the massive growth in the blockchain network, as well as to reduce transaction fees. As Roberts also notes, these miners are part of a consortia that includes “certain exchanges, wallet providers, market makers, and storage vaults.” On the opposite side of the spectrum are those who maintain the core protocol that comprises the Bitcoin network.

Below is a rundown of interplay between bitcoin, Bitcoin Cash and the upcoming SegWit2X hard fork.

Bitcoin (BTC)SegWit Activated No Increase in Block Size
Bitcoin Cash (BCH)No SegWit ActivatedIncreased Block Size to 8MB
SegWi2x (B2X)SegWit ActivatedIncrease Block Size

The Game Plan

As one might expect, the broader implications of SegWit2x likely won’t be known until fork day. But that shouldn’t stop you from formulating a game plan. The big question mark right now is which version of bitcoin will get the much coveted BTC ticker name. As it currently stands, exchanges have not opined about which version of bitcoin they will support, although Bitfinex will run the SegWit2x chain as B2X.

On the GDAX, hash power will decide which chain gets the BTC ticker. So far, there is no news on what Bitstamp, bitFlyer and Kraken aim to do.

Rather than track a couple dozen bitcoin exchanges, investors may want to focus on Coinbase. The San Francisco-based platform has long been viewed as the industry’s proxy; how it chooses to handle the fork (and potential split) will have direct implications on the market.

A hard fork is a software change that runs the risk of splitting the blockchain into two, particularly if the community disagrees about it. (Laura Shin, Forbes)

When it comes time to fork, market participants need to be clear about their intentions. The first question you need to ask is: Do I plan on transacting with the various bitcoin chains anytime soon, or am I keen on holding the coins as long-term investments? If you prefer the latter, then you should be thinking about storing your coins in a wallet. (Note: paper and hardware wallets offer more security.)

Those of us who are speculating in bitcoin need to be aware that the upcoming fork could get very messy. It is unclear which chain the exchanges will list as BTC, which means the price of BTC could differ vastly across the brokerage community. (Note: if you observe vastly different prices for BTC, it means you’re looking at two different coins.)

Adding more confusion is the fact that the SegWit2x protocol will fork without adequate replay protection. This means BTC and B2X transactions will appear identical after the fork. To avoid accidentally spending the new coins, you should avoid exchanging from your wallet all together after the fork. This also includes not accepting payments via mobile wallets, since BTC will mirror whichever coin has more hash power.

Furthermore, claiming your coins will prove difficult until well after the fork when dedicated wallets for both blockchains emerge.

If you’re a trader, there’s even more confusion about whether BTC and B2X will have any price correlation. Following the Bitcoin Cash hard fork, BTH and BTC appeared to be inversely correlated for a while. However, lately, anything named bitcoin has moved in the same direction: Up.

The conclusions that we’ve drawn in this section may annoy some of our members, but complex situations usually call for measured steps. In this case, staying on the sidelines until the dust settles might be the best approach.

Altcoin Advantage?

Altcoins have largely benefited from bitcoin’s meteoric rise – that is, until recently. The latest surge in bitcoin has largely failed to take altcoins along for the ride. This has led to speculation that the altcoin universe is undervalued. An exit from the bitcoin asset class could therefore be a tailwind for altcoins pre- and post-fork.

Currently, the original bitcoin controls roughly 63% of the cryptocurrency market. This figure fell below half earlier in the year as investors diversified away from bitcoin while others became more annoyed by bitcoin’s slow transaction process. If diversification is part of your strategy, now might be the top to consider altcoins. The author sees no reason why the altcoin universe cannot control at least half of the cryptocurrency market, especially if we witness a long-anticipated correction in BTC.

Total Cryptocurrency Market Cap With Bitcoin

Total Cryptocurrency Market Cap Without Bitcoin

Final Considerations

There’s no guarantee that bitcoin prices will plunge after the hard fork. Regardless of which blockchain emerges as the BTC candidate, bitcoin is enjoying plenty of upside thanks to growing institutional support from the major exchanges. Both CME Group and CBOE have announced plans for bitcoin futures relatively shortly. a strong sign that institutional capital will flow like never before.

To recap:

  1. Secure your coins in a paper or hard wallet for extra safety.
  2. Avoid transacting the BTC symbol before and after fork day.
  3. After fork day, access your coins only when you see dedicated wallets for both blockchains.
  4. Take advantage of the undervalued altcoin universe if bitcoin becomes volatile.

As fork day looms, keep your wits (and coins) about you and stay out of trouble.

Featured image courtesy of Shutterstock.